Water, oil and the mob

Another defeat for privatisation as the sick man of South America becomes even harder to govern

WHO would try to govern Bolivia? Hoping perhaps that the population would be distracted by New Year celebrations, on December 30th the government of Carlos Mesa announced a rise of 23% in the price of diesel fuel and of 10% for petrol. The reaction was swift: “civic strikes” shut down two of the country's three biggest cities, Santa Cruz in the east and El Alto, a sprawling satellite of La Paz, the capital. Bus owners grudgingly went back to work but in Santa Cruz farmers staged hunger strikes and sit-ins in government offices. To end the street blockades in El Alto—which cut off the airport—the government made a different concession: it said that it would scrap an unpopular contract under which a French group supplies water to the city. Then, on January 19th, Mr Mesa lopped 6% from the new fuel prices.

That may buy a respite for the president. But his government—never robust—looks increasingly fragile. The president is personally popular, though less so than he was. With the country's political parties deeply discredited, not much stands between Bolivia and mob rule. “They are not allowing me to govern,” Mr Mesa complained in a televised speech on January 9th. “We are facing the risk of a climate of uncontrollable violence.”

In October 2003 a similar protest in El Alto, in which 59 people were killed, toppled the elected president, Gonzalo (“Goni”) Sánchez de Lozada, a pro-American free-marketeer. Mr Mesa, a historian and broadcaster who was the vice-president, took over the top job. He has tried to steer a middle course, repudiating many of Goni's policies but resisting the protesters' demands for wholesale nationalisation. It has not been easy.

Take the explosive issue of oil and gas. In July, Mr Mesa won a referendum whose carefully crafted questions gave him a fairly free hand to negotiate an increase in taxes paid by foreign companies brought in when Goni privatised the oil and gas industry in his first term a decade ago. But Evo Morales, the leader of the coca workers and of the radical Movement to Socialism, who came second in the 2002 presidential election, wants the industry renationalised. In the current political climate, few of Bolivia's discredited traditional politicians are prepared to be outflanked on the left. So Congress amended the hydrocarbons bill to give the state a dominant role and apply this retroactively. That has produced a stand-off between president and Congress, which may also reverse the fuel-price rise.

Water has become another political trophy. In 1996, Goni's government awarded a contract to operate the water and sewerage system in La Paz and El Alto to Aguas del Illimani, a consortium in which Suez, a French services group, has a majority stake. The company insists that it has kept its side of the contract: it has invested $63m (though some of this was soft loans through the government). After years in which the state water company failed to keep pace with demand, Aguas del Illimani expanded coverage, especially among the poor. The annual rate of new sewerage and water connections rose by two-thirds in the first years of the contract.

But in 2000 protests forced the cancellation of a similar water contract in Cochabamba, Bolivia's third city, with a foreign group including Bechtel, an American construction firm. Shortly afterwards, the government rejected a request by Aguas del Illimani to raise tariffs—which are lower than those charged by public-sector water firms to help pay for the expansion of coverage. Instead it decreed a rise in connection charges. These now total $450 for water and sewerage—or six months' wages for poorer Bolivians. So the increase in coverage has slowed. Meanwhile, El Alto is expanding fast, as migrants flood in from the impoverished countryside.

“Some people would have been left without water for a decade,” says José Barragán, the deputy minister in charge of water. As discontent over the issue mounted in El Alto last year, the government asked the company to renegotiate the contract. “We received only negatives,” says Mr Barragán. The government was put under further pressure to act when the mayors of both cities, re-elected in December, called for the recision of the contract.

A decade ago, Bolivia—one of the poorest countries in South America—was an unlikely standard-bearer for privatisation and free-market reform. For a while, these policies produced steady, if unspectacular, economic growth. Then came a regional recession, and the public mood changed.

Bolivia's turbulence is being watched with concern by the United States, which worries about rising drug production and the prospect of Mr Morales taking power. Brazil's left-wing government, which worries about instability on its country's borders, has tried to restrain Mr Morales. Petrobras, Brazil's state oil company, is the largest investor in Bolivia's hydrocarbons industry; it has said it will seek compensation if its business is seriously affected by the new hydrocarbons law.

Bolivia's retreat from its reforms is unlikely to help its poor majority. Thanks largely to private investment, many more Bolivians, and especially poorer ones, have basic services: in 1992, only 50% had water and 40% had sewerage, and in 1997 only 45% had electricity. Today, according to the World Bank, 70% have water, 40% have sewerage and 60% have electricity. The government, which will now take over the water company, is grappling with a fiscal deficit of 6% of GDP. The risk is that other private investors will now pull back—or be pushed out. The next target of the radical leaders in El Alto is the power company, owned by Spain's Iberdrola.

Mr Mesa's respite is likely to be brief. He is committed to calling a Constituent Assembly this year. A new constitution is hardly Bolivia's most urgent need, and it is sure to generate fresh political conflicts. The radicals may yet overreach themselves. Bolivians are unaccustomed to paying much for water or fuel. Anger over the water charges was widespread in El Alto. But the protests will make Bolivia even more dependent on foreign aid. They have provoked secessionist rumbles from the less poor and pro-capitalist east. Mr Morales's party won 19% in the municipal elections, more than any other party but less than he had obtained in 2002. There may be a moderate majority in Bolivia, but it is staying silent for now.